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There's no need for wringing of hands by investors. When a fund is adopted, it joins the roster of products marketed and distributed by a larger fund company. But typically the original firm continues to be the day-to-day manager of the portfolio.

Some things you should know if you get word of an adoption involving a fund you own:

What exactly is a fund adoption?

In a typical adoption, a large mutual-fund company takes over management of a fund or several funds from a smaller firm, retaining the fund's investment managers as subadvisers. There is usually a cash payment to the smaller firm based on the size of the fund, its track record and the length of that track record.

ENLARGE

Jon Krause

"Adoptions are a very prudent way" to expand a fund lineup with proven managers, says
Jeff Ringdahl,
chief operating officer of American Beacon Advisors, which has adopted four funds this year.

It's hard to know exactly how many funds have been adopted in recent years. The transactions aren't always announced, and the big mutual-fund data providers don't keep track. Just a handful have been announced in the past 12 months. There will be more in coming years, says Ben Phillips, a partner at Casey, Quirk & Associates, a Darien, Conn., management-consulting firm focused on advising investment-management companies.

The typical fund being adopted has between $500 million and $2 billion in assets, says Avi Nachmany, research director and executive vice president at Strategic Insight, a New York research and consulting firm. But some adoptions involve much smaller funds. Bridgeway Large-Cap Value had just $27 million in assets and a four-star rating from
Morningstar
Inc.
when it was taken over by American Beacon earlier this year to become
American Beacon Bridgeway Large Cap Value
.

What is the impetus behind these transactions?

Among people who start small investment companies, typically "their skills and passion are in managing money" more than in managing the business, says Mr. Nachmany. "To have scale, access to the market, access to investors, more investment managers are finding that they need help."

ENLARGE

Funds that are adopted tend to be highly rated for their investment performance. The adopting company gets that track record and can expand its offerings without undertaking a major acquisition or starting a new fund from scratch, while the fund being adopted can get more exposure and grow.

Asset growth can benefit both the new adviser and the subadvisers, which share in fund-management fees. The company that gives up a fund or funds for adoption typically also gets cash to invest in its business.

A mutual fund should "have some level of size so you have some economies of scale," says
Tim Taussig,
president and chief operating officer of Epoch Investment Partners, which focuses primarily on separate accounts for institutions. "You can build it yourself or you can partner. We have chosen to partner."

What should I do if my fund is set for adoption?

Fund adoptions generally require shareholder approval, which means you will get a proxy statement describing the rationale for the transaction and how the adopted fund will be structured and managed. The document can be complicated. Ask about anything that isn't clear. Investors also may be able to dial into a conference call for financial advisers and analysts.

Look for fees and any change in the fund's investment objective. "Investors should always ask, why is this deal happening?" says
Josh Charney,
an analyst at fund research firm Morningstar. "Is management cashing out? Is the acquirer trying to increase assets or become more reputable in the industry?" A Web search can provide details about the adopting organization's record.

What changes for investors in an adoption?

With most fund adoptions, existing shareholders won't notice a difference, as the hands-on portfolio manager remains the same, with the same investment strategy. Management fees may go down slightly because of economies of scale. If the new fund parent charges 12b-1 marketing and distribution fees or is focused on funds sold through financial advisers, which have a load, or upfront sales commission, existing shareholders typically will be in a class of shares without these fees.

For MainStay's adoption this fall of the $2.7 billion Marketfield Fund from Marketfield Asset Management, for example, MainStay created five share classes, each with a different fee structure, according to the proxy statement. Existing Marketfield shareholders will get the institutional class, which doesn't charge a load or 12b-1 fees.

But new shareholders may be charged all or some of those fees, and a high minimum investment is sometimes required.

In some cases, the portfolio manager may be replaced in the course of the adoption. When
Virtus Investment Partners
adopted the $112 million DCA Total Return Fund in December, for instance, it brought in two of its own affiliated managers as subadvisers. The fund is now called
Virtus Total Return
.

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